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Financial market breakdown due to strategy constraints and information asymmetry
This paper demonstrates the relevance of strategy constraints on market makers to the possibility of financial market breakdown when there is information asymmetry between market makers and investors; both the case of competitive market makers and the case of a monopolistic market marker are included. Specifically, the paper discusses three types of strategy constraints on the market makers and their implications for the equilibria. The results call attention to the need for more precise specifications of institutional environments (beyond information asymmetry and the mode of ...
Insider trading, costly monitoring, and managerial incentives
In this paper we show, in an incomplete contracts framework that combines asymmetric information and moral hazard, that by permitting insiders to trade on personal account the equilibrium level of output can be increased and shareholder welfare can be improved. There are two reasons for this. First, insider trading impounds information regarding the costs and benefits of effort and perk consumption into asset prices, which allows shareholders to choose more efficient portfolio allocations. Second, allowing insider trading can induce managers to increase their stake in the firm beyond that ...
Information ambiguity: recognizing its role in financial markets
The insider trading debate
Securities trading has generated some of the most sensational scandals in the popular business press. In one of the most publicized cases of insider trading, in the late 1980s Michael R. Milken and Ivan F. Boesky were sentenced to stiff prison terms and payment of enormous damage assessments and punitive penalties. However, at least among economists and legal scholars, insider trading remains a controversial economic transaction. A substantial body of academic and legal scholarship questions whether insider trading is even harmful, much less worthy of legal actions. ; The authors of this ...
Mergers and acquisitions in China
Mergers and acquisitions are an integral part of any market economy, enhancing an economy's efficiency by reallocating and recombining production resources for better use. In China, the development of mergers and acquisitions activity has played a positive role in privatizing and revitalizing the country's inefficient state enterprises, attracting foreign investment, and rationalizing the industrial structure. The authors of this article discuss this development in the context of China's market-oriented economic reform and provide an outline of the advantages and disadvantages of the ...